Key Points

  • Complacency is finally being put to the test with regard to the impact of the coronavirus on global/U.S. growth, earnings estimates and stocks.

  • Complex global supply chains are being put to the test; with the virus representing a massive supply shock.

  • U.S. and global central banks are expected to ease policy; but the impact is likely to be limited.

Complacency has been evident with regard to the stock market’s behavior and the impact of the coronavirus on global growth … that is until today perhaps. In mid-January, I wrote about highly-optimistic investor sentiment—seen in both behavioral and attitudinal measures of sentiment. The initial outbreak of the virus conspired to shake that optimism; but after a mild 3.3% pullback in late January, complacency built yet again on hopes of a containment of the virus.

~80k and counting

The latest coronavirus news is not good, with a surge in cases outside of Mainland China. For those who haven’t yet discovered it, this dashboard from Johns Hopkins University’s Center for Systems Science and Engineering (CSSE) provides real-time updates of the number of cases, deaths and recoveries; as well as the geographic distribution thereof. [Caveat: As of today, we are finding that the site has been sporadically down.] As of early this morning, the total number of cases globally is approaching 80k, with more than 77k in Mainland China; but a rapid increase in recent days in South Korea, Italy and Japan (there are now 35 cases in the United States).

Other than during wars, the scope of the shutting down huge swaths of the world, associated with the virus, is unprecedented. There are about 60 million people in China alone that are quarantined. Labor-intensive manufacturing and service sectors are finding it difficult to re-open because of the difficulty of getting their migrant workers through quarantine and/or across provincial boundaries. Bloomberg estimates that the Chinese economy as a whole is operating at well less than half of normal capacity.

Not just China’s problem

Outside the region, Italy and South Korea (the eighth and 12th largest economies in the world, respectively) are shutting down public buildings, sporting events and schools in parts of those countries. In the case of Italy, at least 10 towns around Milan have gone under lockdown; and authorities are increasingly concerned given that all flights to/from China were canceled as of early February.

Some of the more troubling data is associated with the singular geneses of some of the spreading. The nearly 700 infections on the Japanese cruise ship are reported to have started with one man who came from Hong Kong. In South Korea, it was discovered that one person had the virus and attended a 1000-member church service—now there are more than 800 people infected in the country (not all tied to the church attendee); with an increasing number of city lock-downs and quarantines.

A burgeoning number of companies are issuing warnings about the impact of coronavirus on their business, the global supply chain and global economic growth overall. BCA Research has zero growth expected for global GDP in the first quarter, while Evercore ISI’s head of China research, Don Straszheim, expects GDP growth in China could decline by double-digits in percentage terms in the first quarter (not that China is likely to report that publicly). In addition, ISI’s widely-watched weekly company surveys include one recently of 21 multinationals; with that survey showing that sales weakened to a record low (in the 15-year history of those surveys).